MUMBAI, Feb 21 (Reuters) - India plans to raise about $880 million next month cutting its stakes in two state companies, sources with direct knowledge of the matter said, a move that will help the government tackle the budget deficit.

Asset sales are a key part of the government’s plan to cut the deficit to 5.3 percent of gross domestic product for the fiscal year to end-March, from 5.8 percent in 2011/12, to avoid a credit downgrade.

The government was expected to sell a 10.82 percent stake in steelmaker Steel Authority of India Ltd via a share auction in the third week of March, three sources with direct knowledge told Reuters on Thursday.

The SAIL stake is worth about $620 million at current prices and its sale would leave the government with a 75 percent stake.

The government also plans to sell a 12.15 percent stake worth about $260 million in National Aluminium Co Ltd (Nalco) early next month, two other sources said.

All the sources declined to be named because they are not authorised to speak to the media before a public announcement.

Neither Nalco nor SAIL was available to comment.

Investor roadshows in overseas markets for the Nalco share sale started this week, while those for SAIL were expected to start in the first week of March to test investor appetite, the sources said.

“The pricing of the two offerings will be decided after getting the responses from the potential investors. There will be a discount to the current market price and will be in line with the current issues,” one of the sources said.

The government raised $2.2 billion selling shares in state-run power utility NTPC on Feb. 7, following sales of shares in Oil India Ltd this month and miner NMDC in December.

The government, which aims to raise $5.1 billion through stake sales by March 31, has raised nearly $4 billion. The Nalco and SAIL share sales will leave it close to the target.

The government will likely target 400 billion rupees ($7.4 billion) proceeds from stake sales in state-run companies in 2013/14, a finance ministry official told Reuters last week.